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China has had a tremendous impact on rare-earth mineral production and prices for decades and the country's restriction of exports sent prices soaring over the past year and a half. That has been a boon for miners like Lynas and Molycorp (NYSE: MCP ) who haven't even reached full production yet.
Recently China gave the stocks another shock when it said it would increase its rare-earth export quota in 2012, reversing a string of recent drastic cuts. The ever-changing landscape has led Molycorp CEO Mark Smith to post some interesting points on the company's blog. Here are my takeaways.
China is integrating vertically
Smith argues that export quotas are becoming less relevant because China is vertically integrating its own rare-earth industry and tightens supply domestically.
In past years China's rare-earth mineral exports were something of a Wild West show, with illegal mining and exports a norm in the country. But consolidation of the industry and tighter environmental reforms have cut back on supply, meaning there's less left over to export.
China is also building downstream capabilities to capture more of the value in the rare-earth mineral market. This includes magnet production and other finished materials, the same strategy used by Molycorp in its recent acquisition binge.
China will eventually be a rare-earth importer
Molycorp and others believe China will actually be an importer of some rare earth minerals by 2014 or 2015. This is an about-face from the country accounting for nearly all of the world's production just two years ago.
The market has a lot of sorting out to do between now and then with tens of thousands of metric tons of rare earth mineral production coming online in the next two years. But if China becomes an importer, it will leave more opportunity for other miners.
The future of production
If China does indeed become a rare earth importer in the next few years it may mean the market is big enough to support some of the struggling junior miners in the sector. Avalon Rare Metals (AMEX: AVL ) and Rare Element Resources (AMEX: REE ) are trading near 52-week lows on the stock exchange because of falling rare earth mineral prices and long production lead times. Both companies are making progress toward production and the market's reaction to both increased supply from Molycorp and Lynas and China's importing rare-earths will go a long way toward telling us if they'll be successful.
I have my doubts about rare-earth mineral prices remaining high after Molycorp and Avalon reach full production but time will tell how much more supply the world can handle.
Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.